All the solar in China:
How patient capital from the government facilitates innovation
The decision of the US Commerce Department in March 2012 to impose tariffs on solar panels imported from China made the Chinese solar industry again a hot issue. The tariffs will be small, at 2.9 to 4.73 percent, but the impact is broad. Last year, 47 percent of solar panels installed in the United States were made by Chinese companies, according to the New York Times (March 20). Three Chinese solar companies, Suntech, Yingli and Trina, led the market by taking 17%, 11% and 10% market shares respectively. In fact, the boom in the US solar energy market over the last two years was accompanied by a surge of solar panels imported from China, jumping from US$1.1 billion in 2010 to more than US$2.6 billion in 2011. In 2004, imports from China were virtually non-existent.
Indeed, over the past few years, China has emerged as the global manufacturing center of solar cell and solar panels. According to SolarServer, a consultancy, Suntech from Wuxi, China surpassed the previous industry leader, US’s First Solar to become the world’s largest solar panel manufacturer by revenue in 2010. In the same year, both Suntech and JA Solar (Shanghai, China) surpassed First Solar in manufacturing capacity as well. By 2011 six of the top 15 solar cell manufacturers and seven of top 15 solar panel producers in the world were based in China.
The formidable competitiveness of the Chinese solar companies comes from the higher-quality, lower-cost products they have generated. The Chinese industry leaders Suntech, Yingli and Trina produced the lowest-cost solar cells in the world, while maintaining the highest profit margins (19-22% in 2009-2011) in the industry, according to the consulting firm Greentech Media Research.
What is the source of Chinese competitiveness in solar? US solar companies claim that the Chinese companies enjoy government subsidies, including cheap loans, research and development assistance, and export subsidies. Of course, every industrial nation provides these types of subsidies to its companies. But subsidies do not sell solar energy products. In 2010, when the US secretary of energy, Steven Chu, visited Suntech, he saw “a high-tech, automated factory”. So, China’s competitive advantage is not cheap labor. In 2012, MIT’s Technology Review noted the world-record efficiencies in Chinese-made solar cells, achieved over the years by Chinese companies through developing better ways of manufacturing, or what is called incremental innovation.
Nevertheless the role of the Chinese government, particularly the local ones, is critical in the process of innovation. The early history of Suntech is illuminating. The company was founded by Shi Zhenrong, a returnee scientist who brought back solar cell technology from Australia. While solar power was a distant vision in 2001, Shi successfully persuaded the city of Wuxi to invest US$6 million in his venture, mainly through the city’s state-owned enterprises. In the first five years, there was no market for solar cells, but the city continued to invest in Suntech, allowing Shi and his engineers to improve their technology. By 2005, when the boom of the German solar market occurred, Suntech was well positioned to seize the opportunity with its well-developed technology.
Thus, it was patient capital, or financial commitment, provided by the local government that had enabled innovation to take place in the face of great, uncertainty. In 2010, when seven leading solar companies received enormous loans of US$30.3 billion from the China Development Bank, they were already formidable global competitors.
Yin Li is the senior editor at ChinaAnalysis.com. Currently, he is writing a paper with Professor William Lazonick on "China's Path to Indigenous Innovation", documenting how innovation is generated in China through the dynamic interaction between the government and companies.